OCC Spells Out Banks' Options In Workouts

WASHINGTON - The Office of the Comptroller of the Currency released a memorandum Thursday that spells out the options available to national banks for restructuring troubled loans.

The memo also tells bankers how to account for income received from bad debts.

Fears of Tough Exams

The document, Banking Circular 255, is part of an effort by federal regulators to assure that examiners will not automatically criticize restructurings of loans to borrowers that are having problems repaying. Fears of tough exams were believed to have pinched credit availability in at least some regions.

"This issuance ... is intended to encourage depository institutions to continue to work with borrowers who are experiencing difficulties and to avoid restricting the availability of credit," the memo states.

Among other highlights in the 10-page memo:

* National banks can extend longer-term credit to real estate developers who originally received only interim financing.

* A bank should not shy away from a good loan just because of a concentration of loans to that industry. "The level of loans to a particular industry should not deter management from exercising its best judgment," the OCC advised.

Banks also may renegotiate the terms of troubled loans with borrowers, the agency said. On a $10 million credit that has been put on nonaccrual status with a $1 million writedown, the lender split it into a $9 million loan with a market rate of interest - and with the chargeoff treated as a $1 million loan at a below-market rate. As long as the bank is confident that the borrower can continue payments, the $9 million loan may be considered performing.

The treatment differs from "loan-splitting" in that a formal renegotiation with the borrower must take place and an agreement must be reached that the amount of the original loan will never be repaid, an OCC official said. Regulators have dropped plans to implement a loan-splitting rule because it did not require the renegotiation.

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